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Buying a business, or selling a business is a lot of work for both parties. When you have finally come to a verbal agreement and you’re in the final stages of beginning to start a formal deal there are a few key steps necessary to protect the parties and ensure things go smoothly. This is where the business purchase agreement comes into play; a key document outlining the key details of the transaction. This contract, while adding barriers to getting the business you’re hoping to purchase, is critical to the transaction for a variety of reasons and should never be overlooked.
- Always consider the best steps to take when transferring business ownership
- A business purchase agreement is a contract that can help facilitate a business sale transaction
- Having a contract in place protects both the buyer and seller in a business sale transaction
Understanding a Business Purchase Agreement
Whether you’re a buyer or a seller a business purchase agreement is a crucial part of the contractual piece of a transaction. Even if you see the party you’re dealing with as friendly, or doing things as a handshake, this document is important to keep the transaction clean and avoid issues in the future.
What Is a Business Purchase Agreement?
A business purchase agreement is a sales contract which outlines the sale of a business between two parties; it covers a variety of topics such as what is being sold, when, and clauses for disputes, among other items.
How Does a Business Purchase Agreement Work?
A legal expert may draft up a purchase agreement for a buyer which outlines the expectations of what is being sold and under what terms. Less common, but not uncommon, a seller may provide this document to a buyer as well.
When Is a Business Purchase Agreement Required?
Any time there is a sale of the assets of a business a business purchase agreement is recommended. They can protect both the buyer and seller in the transaction by clearly outlining what's being exchanged, when, for how much, and what to do if things don’t go so smoothly.
Why Is a Business Purchase Agreement Important?
It will outline important items that must be fulfilled for a transaction to complete; for example the amount to be paid from the buyer to the seller, how it will be paid, when it will be paid, and what items are being purchased for those amounts .
Can I Write My Own Business Purchase Agreement?
It is possible to write your own business purchase agreement, and templates exist on websites such as rocketlawyer.com; however be sure to speak with a legal professional prior to relying on your own work as it is a legal document which must be enforceable to serve the purpose it sets out to achieve.
What’s Included in a Business Purchase Agreement?
There are many elements of a business purchase agreement. While not all agreements are the same, some common elements can be found in these documents
- Identification of Parties: A business purchase agreement will outline the buyer and the seller, whether the business or the individual depending on the structure of the deal or party representing the sale.
- Business Description: A description of the business, its legal structure, and its operations may be included in the business purchase agreement to ensure both parties are describing the same asset.
- Purchase Price and Terms: This section should outline the amount to be paid from the buyer to the seller, how it will be paid, when it will be paid, and what items are being purchased for those amounts. You might expect clear expectations on how payment will be made in this section, for example via wire, or check.
- Type of Sale: The type of sale section describes some of the liability from the sellers sides, which can include “as is” where the buyer assumes all risks, or contingent on certain aspects of the asset, like there are no liens on existing property.
- Asset and Liability Transfer: The transfer of assets and debts may be described in this section, outlining how physical and digital assets may move from one party to the other, i.e. ship on a certain date; and how debts of the business will be transferred, such as the new owner assuming an existing loan
- Closing Date, Time, and Logistics: You will find closing terms in this section which define when and where parties need to be to close the deal. This is similar to a home closing, where a third party title company is used to transfer the property. Note this is not always necessary, some business sales happen digitally.
- Warranties, Contingencies, and Representations: An important section for both parties, the legalese is spelled out; what happens after the sale if something is not as it was advertised to the buyer by the seller, or a claim occurs from the operation of the business during the seller's time as owner.
- Governing Law and Dispute Resolution: Another important legal section which defines which state or rules of law apply to the contract and what process will be followed if there is a dispute in the future; whether arbitration should occur versus a court ruling and who should pay.
- Signatures of the Parties: Now that the key items of the contract have been spelled out both parties would sign and date this section to complete the acknowledgement of how the transaction should be conducted and under which terms.
- Appendices: The appendix may contain additional information relevant to the sale and it is really up to the drafter of the contract to determine. An example may be the list of assets being sold and the values of those assets, or any debts.
Step-by-Step Guide to Creating a Business Purchase Agreement
Creating a business purchase agreement can be done by a party of the transaction but it is highly recommended to utilize a legal resource for this portion of the sale as contracts must be enforceable to protect both the buyer and seller.
Gather the Details: Collect all the information you’ll need about the buyer, seller, and the business or the assets being purchased. This includes financial information, legal entity information, and a complete list of the assets and debts involved.
Define the terms: Define the terms of the agreement, including the sale price, payment details such as how the funds should move, and any contingencies or dispute resolution details both parties will agree to .
Draft the agreement: Use a template or work with a lawyer to draft the agreement. This portion should hit the main topics covered in this article, and at a minimum should be reviewed by a legal professional if drafting yourself.
Mistakes to Avoid When Writing a Business Purchase Agreement
The biggest mistake to avoid when writing a business purchase agreement is to not have a legal professional review and discuss what is and is not enforceable about the document. Be sure that you understand what you are signing prior to signing.
Another mistake to avoid is to be sure of the risks associated with the sale; if you are the buyer what type of recourse this will leave you. Are you buying “as-is” and will not have any means of shifting liability to the seller? This is another key topic to review with a legal professional.
While purchasing or selling a business is exciting, stressful, and a long process, be sure to not get over eager, or rely on handshakes to finalize the deal. The business purchase agreement can protect both the buyer and seller from uncertainty, create clear guidelines to follow for both parties, and ensure that transactions go smoothly. If things do not go perfectly as planned this document will ensure the predetermined steps are followed and reduce the added stress associated with a bad deal.
To further facilitate your acquisition journey, check out our guide on the best business acquisition loans, tailored to provide you with the financial knowledge and resources you need.